CITY OF KENYON
KENYON, MINNESOTA
MANAGEMENT LETTER
YEAR ENDED
DECEMBER 31, 2009
April 6, 2010
Management, Honorable Mayor and Council
City of Kenyon, Minnesota
We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the
aggregate remaining fund information of the City of Kenyon, Minnesota (the City), for the year ended December 31, 2009 and
have issued our report thereon dated April 6, 2010. Professional standards require that we provide you with the following
information related to our audit.
Our Responsibility under Auditing Standards Generally Accepted in the United States of America and Government
Auditing Standards
As stated in our engagement letter, our responsibility, as described by professional standards, is to express opinions about whether
the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity
with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not
relieve you or management of your responsibilities.
Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements
are free of material misstatement. As part of our audit, we considered the internal control over financial reporting of the City.
Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning
such internal control over financial reporting. We are responsible for communicating significant matters related to the audit that
are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are
not required to design procedures specifically to identify such matters.
Significant Audit Findings
In planning and performing our audit, we considered the City’s internal control over financial reporting as a basis for designing
our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of
expressing an opinion on the effectiveness of the City’s internal control over financial reporting. Accordingly, we do not express
an opinion on the effectiveness of the City’s internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material
weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that material
misstatement of the City’s financial statements will not be prevented, or detected and corrected on a timely basis.
Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies,
significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting
that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over
financial reporting, described on the following pages as findings 2009-2, 2009-3 and 2009-4, that we consider to be significant
deficiencies in internal control over financial reporting. A significant deficiency is a deficiency, or combination of deficiencies, in
internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with
governance.
City of Kenyon
April 6, 2010
Page 2
2009-2
Limited Segregation of Duties Related to Cash Disbursements (finding since 2007)
Condition:
During our audit we reviewed procedures over transaction cycles related to cash disbursements,
utility billing, and payroll and found the City to have limited segregation of duties related to the
disbursements cycle.
Criteria:
There are four general categories of duties: authorization, custody, record keeping and
reconciliation. In an ideal system, different employees perform each of these four major functions.
In other words, no one person has control of two or more of these responsibilities.
Cause:
The bookkeeper of the City maintains and controls the check stock, prepares checks, records
disbursements, initiates wire transfers, and prepares the bank reconciliation.
Effect:
The existence of this limited segregation of duties increases the risk of misstatement or fraud.
Recommendation:
While we recognize the number of staff is not large enough to eliminate these deficiencies entirely,
we believe the risk has been reduced with better monitoring through the administrator reviewing
cancelled checks and unopened bank statements.
The City should also be reminded of their duties over finance at least annually. Some typical
monitoring duties would include the following tasks:
Management Response:
o
Claims approval is an important control and should be at the front of the meeting to
ensure that the council reviews the claims closely.
o
A thorough review of budget versus actual reporting and narrative at least quarterly.
o
Monitor progress over the development of documented policies and procedures.
o
The check sequence should be reported in each set of approved minutes. The council
should review the order the checks approved to ensure that they move in sequence and
any gaps in number are explained.
o
Consider personnel policies that require someone else to fill finance duties for a period of
time. A mandatory vacation period of one week for all finance staff and distribution of
their duties for that week is often recommended.
The Council reviews all checks on a monthly basis and approves these by check sequence. A
summary statement compares the actual expense and revenues to the budgeted expense and
revenues. This process is incorporated in the approval of the consent agenda.
City of Kenyon
April 6, 2010
Page 3
2009-3 Preparation of Financial Statements (finding since 2007)
Condition:
As in prior years, we were requested to draft the audited financial statements and related footnote
disclosures as part of our regular audit services. Recent auditing standards require auditors to
communicate this situation to the Council as an internal control deficiency. Ultimately, it is
management’s responsibility to provide for the preparation of your statements and footnotes, and
the responsibility of the auditor to determine the fairness of presentation of those statements. It is
our responsibility to inform you that this deficiency could result in a material misstatement to the
financial statements that could have been prevented or detected by your management. Essentially,
the auditors cannot be part of your internal control process.
Criteria:
Internal controls should be in place to ensure adequate internal control over safeguarding of assets
and the reliability of financial records and reporting.
Cause:
From a practical standpoint, we both prepare the statements and determine the fairness of the
presentation at the same time in connection with our audit. This is not unusual for us to do with
organizations of your size.
Effect:
The effectiveness of the internal control system relies on enforcement by management. The effect
of deficiencies in internal controls can result in undetected errors. As in prior years, we have
instructed management to review a draft of the auditor prepared financials in detail for accuracy;
we have answered any questions that management might have, and have encouraged research of
any accounting guidance in connection with the adequacy and appropriateness of classification of
disclosures in your statements. We are satisfied that the appropriate steps have been taken to
provide you with the completed financial statements.
Recommendation:
Under these circumstances, the most effective controls lie in management’s knowledge of the
City’s financial operations. It is the responsibility of management and those charged with
governance to make the decision whether to accept the degree of risk associated with this condition
because of cost and other considerations. Regarding the specific situations listed above, we would
offer the following specific recommendation: 1) Utilize a disclosure checklist to ensure all required
disclosures are present and agree to work papers, and 2) Agree your accounting information from
Banyon to the amounts reported in the financial statements.
Management Response:
For now, the City accepts the degree of risk associated with this condition and thoroughly reviews
a draft of the financial statements.
City of Kenyon
April 6, 2010
Page 4
2009-4 Liquor Store Inventory Reconciliation (finding since 2007)
Condition:
The liquor store’s point of sale inventory system is not used regularly to reconcile inventory or
analyze profits. Also, there is no formal review of variance reports after physical cycle counts are
done.
Criteria:
The point of sale system is designed to track purchases, sales, and inventory balances at the point
of sale or purchase. Having a point of sale system adds additional control over products being
purchased and sold at the store.
Cause:
Unknown.
Effect:
Without regularly documented reconciliations of the point of sale system to the actual inventory,
management is not able to track variance trends.
Recommendation:
We recommend cycle counts be done on a semi-monthly basis. Cycle counts consist of counting
all of one type of product and matching it to the inventory point of sale system. Inventory
adjustment reports should be printed and retained for each cycle count. Management can then use
these reports to notice trends such as whether they are making adjustments to the same product
each time a count is performed. If this is the case, it may raise concerns of theft. This will be an
important step in 2010 especially with the decrease in gross profit percentage.
Management Response:
The City changed the management structure in 2009 and has implemented an inventory cycle count
on a semi-monthly basis.
City of Kenyon
April 6, 2010
Page 5
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed
tests of compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a
direct and material effect on the determination of financial statement amounts. However, the objective of our tests was not to
provide an opinion on compliance with such provisions. We noted the following instances of noncompliance with Minnesota
statutes:
2009-1
Advertisement for Bids
Condition:
Minnesota statute 412.311 requires that bids be published for at least ten days in advance of the
last day for the submission of bids. During 2009 the Kenyon Municipal Utilities Commission (the
Commission) had a bid that was published for a period of less than ten days.
Criteria:
Bids must be published for at least ten days in advance of the last day for the submission of bids in
the official newspaper.
Cause:
The Commission did not publish its request for bids in the official newspaper for at least ten days
in advance of the last day for the submission of bids. The Commission only published the request
for eight days prior to the date of submission.
Effect:
The Commission did not comply with the requirements of Minnesota statute 412.311.
Recommendation:
We recommend those in charge of requesting bids review requirements prior to requesting the
bids.
Management Response:
The Commission board and staff have been notified of the non-compliance and will review these
requirements in the future.
Planned Scope and Timing of the Audit
We performed the audit according to the planned scope and timing previously communicated to you.
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used
by the City are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of
existing policies was not changed during the year. We noted no transactions entered into by the City during the year for which
there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements
in the proper period.
Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s
knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are
particularly sensitive because of their significance to the financial statements and because of the possibility that future events
affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were
depreciation and historical costs for capital assets.
City of Kenyon
April 6, 2010
Page 6
Management’s estimate of depreciation is based on estimated useful lives of the assets. We evaluated the key factors and
assumptions used to develop depreciation in determining that it is reasonable in relation to the financial statements taken as a
whole.
The disclosures in the financial statements are neutral, consistent, and clear. Certain financial statement disclosures are
particularly sensitive because of their significance to financial statement users.
Difficulties Encountered in Performing the Audit
We encountered no difficulties in dealing with management in performing and completing our audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those
that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements.
In total, we prepared 21 journal entries identified in the table below. These entries are necessary to adjust balances to the proper
year end amount. It is important that the City understand these entries and prepare to make them in the future. Internal preparation
enhances the quality and timeliness of internal information.
Accounting entries
Audit entries
Total
14
7
21
We have provided descriptions for all of the audit entries detected as a result of audit procedures that were corrected by
management below:
•
Adjust tax and assessment revenue and receivables for $41,002 in various funds.
•
Adjust the value of a capital asset by increasing capital outlay by $5,885 in the Capital Outlay fund. This entry was made
in order to state that asset at historical cost. This entry also increased construction in process in the government-wide
financial statements by the same amount.
•
Record building improvements of $38,189 as a capital asset in the government-wide financial statements.
•
During the year a fire truck was sold to a neighboring city. This fire truck was fully depreciated with an original cost of
$75,000. An entry was made to adjust the government-wide financial statements for the decrease in the asset and the
related decrease accumulated depreciation.
City of Kenyon
April 6, 2010
Page 7
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s
report. We are pleased to report that no such disagreements arose during the course of our audit.
Management Representations
We have requested certain representations from management that are included in the management representations letter dated
April 6, 2010.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to
obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s
financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional
standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our
knowledge, there were no such consultations with other accountants.
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with
management prior to retention as the City’s auditors. However, these discussions occurred in the normal course of our
professional relationship and our responses were not a condition to our retention.
City of Kenyon
April 6, 2010
Page 8
Financial Position and Results of Operations
Our principal observations and recommendations are summarized on the following pages. These recommendations resulted from
our observations made in connection with our audit of the City’s financial statements for the year ended December 31, 2009.
General Fund
The General fund is used to account for resources traditionally associated with government, which are not required legally or
by sound principal management to be accounted for in another fund. The General fund balance increased $101,720 from
2008. The total fund balance is $631,087, which is 59.5 percent of the 2010 budgeted expenditures. We recommend the fund
balance be maintained at a level sufficient to fund operations until the major revenue sources are received in June. We feel a
reserve of approximately 40 to 50 percent of planned expenditures and transfers out is adequate to meet working capital and
small emergency needs.
Minnesota cities must maintain substantial amounts of fund balance in order to meet their liquidity and working capital needs
as an operating entity. That is because a substantial portion of your revenue sources (taxes and intergovernmental revenues)
are received in the last two months of each six-month cycle.
The Office of the State Auditor (the OSA) has issued a Statement of Position relating to fund balance stating “a local
government should identify fund balance separately between reserved and unreserved fund balance. The local government
may assign and report some or all of the fund balance as designated and undesignated.” We recommend local governments
adopt a formal policy on the level of unreserved fund balance that should be maintained in the general and special revenue
funds. This helps address citizen concerns as to the use of fund balance and tax levels.
The purposes and benefits of a fund balance are as follows:
•
Expenditures are incurred somewhat evenly throughout the year. However, property tax and state aid revenues are not
received until the second half of the year. An adequate fund balance will provide the cash flow required to finance the
General fund expenditures.
•
The City is vulnerable to legislative actions at the State and Federal level. The State continually adjusts the local
government aid and property tax credit formulas. We also have seen the State mandate levy limits for cities over 2,500 in
population. An adequate fund balance will provide a temporary buffer against those aid adjustments or levy limits.
•
Expenditures not anticipated at the time the annual budget was adopted may need immediate council action. These
would include capital outlay replacement, lawsuits and other items. An adequate fund balance will provide the financing
needed for such expenditures.
•
A strong fund balance will assist the City in maintaining, improving or obtaining a bond rating. The result will be better
interest rates in future bond sales.
City of Kenyon
April 6, 2010
Page 9
A table summarizing the General fund balance in relation to budget follows:
Fund
Balance
Year
2005
2006
2007
2008
2009
$
Budget
Year
601,085
605,181
654,359
529,367
631,087
Percent
of Fund
Balance to
Budget
Following
Year
Budget
2006
2007
2008
2009
2010
$
1,056,415
1,110,191
1,113,455
1,122,375
1,061,289
56.9 %
54.5
58.8
47.2
59.5
Fund Balance as a Percent of Next Year's Budget
$1,300,000
$1,110,191
$1,113,455
$1,122,375
$1,056,415
$1,061,289
$1,100,000
$900,000
$700,000
56.9%
54.5%
59.5%
58.8%
47.2%
$500,000
$300,000
$100,000
2005
2006
2007
Fund Balance
2008
2009
2010
Budget
We have compiled peer group average fund balance information from reports available on the website of the Office of the
State Auditor for Cities of the 4th class (under 2,500) and from Abdo, Eick & Meyers’ client base of approximately 100
cities. In 2008 the average General fund balance as a percentage of expenditures was 47.2 percent. Based on comparison to
the peer groups, the City’s General fund balance is lower than average but improved significantly in 2009.
City of Kenyon
April 6, 2010
Page 10
A summary of the 2009 operations is as follows:
Final
Budgeted
Amounts
Revenues
Expenditures
$
Excess of revenues over expenditures
1,069,028
999,415
Actual
Amounts
$
995,571
950,238
Variance with
Final Budget Positive
(Negative)
$
(73,457)
49,177
69,613
45,333
(24,280)
118,000
(56,210)
106,347
6,250
(56,210)
(11,653)
6,250
-
61,790
56,387
(5,403)
Net change in fund balances
131,403
101,720
(29,683)
Fund balances, January 1
529,367
529,367
Other financing sources (uses)
Transfers in
Sale of capital assets
Transfers out
Total other financing sources (uses)
Fund balances, December 31
$
660,770
$
631,087
$
(29,683)
Some of the line items with significant variances are highlighted below:
•
Property tax revenue was $59,020 less than anticipated. This was primarily due to budgeting the market value credit
within the tax levy line item and again in the market value credit line item.
•
Local government aid was $37,488 less than anticipated due to unallotments at the State level.
•
Miscellaneous revenues were $12,916 higher than anticipated.
•
Public works expenditures were $33,096 lower than anticipated.
•
Culture and recreation expenditures were $20,950 lower than anticipated.
City of Kenyon
April 6, 2010
Page 11
A comparison between 2007, 2008 and 2009 revenues and transfers is presented below:
Source
2007
Taxes
Licenses and permits
Intergovernmental
Charges for services
Fines and forfeits
Investment earnings
Miscellaneous
Transfers in
$
Total revenues and transfers
362,495
5,833
678,186
68,338
5,978
7,705
67,328
71,174
$ 1,267,037
2008
$
322,355
6,172
567,865
66,008
7,765
(4,356)
17,762
79,777
$ 1,063,348
2009
$
Percent of
Total
301,418
4,251
594,879
65,750
7,548
5,059
16,666
106,347
27.2 %
0.4
54.0
6.0
0.7
0.5
1.5
9.7
$
173
2
341
38
4
3
10
61
$ 1,101,918
100.0 %
$
632
A graphical presentation of 2007, 2008 and 2009 revenues and transfers follows:
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$2007
Taxes
2008
Intergovernmental
Per
Capita
2009
Transfers in
Other
City of Kenyon
April 6, 2010
Page 12
A comparison between 2007, 2008 and 2009 expenditures and transfers is presented below:
Program
General government
Public safety
Public works
Sanitation and recycling
Culture and recreation
Capital outlay
Transfers out
Total expenditures
and transfers
2007
$
304,995
310,696
351,938
34,656
79,398
65,976
70,200
$ 1,217,859
2008
$
2009
374,536
304,124
290,673
34,692
82,814
39,101
62,400
$ 1,188,340
$
Percent of
Total
Per
Capita
314,942
299,083
225,054
34,704
64,210
12,245
56,210
31.3 %
29.7
22.4
3.4
6.4
1.2
5.6
$
181
171
129
20
37
7
32
$
184
186
118
N/A
48
80
N/A
$ 1,006,448
100.0 %
$
577
$
616
A graphical presentation of 2007, 2008 and 2009 expenditures and transfers totals by program follows:
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$2007
General government
Peer Group
Per Capita
2008
Public safety
2009
Public works
Other
City of Kenyon
April 6, 2010
Page 13
Special Revenue Funds
Special revenue funds accounting for revenues sources that are legally restricted to expenditures for specified purposes. The
funds in this fund type group included:
Fund Balances
December 31,
2009
2008
Fund
Nonmajor
Ambulance
Fire
Library
Economic Development Authority
Gunderson House
Police Forfeiture
Special Purpose Donation
2004 Tax Abatement/TIF Sun Home
Total
Increase
(Decrease)
$
6,085
5,128
44,687
81,475
9,896
175
11,424
1,119
$
6,026
4,977
39,658
52,758
7,166
10,953
249
$
59
151
5,029
28,717
2,730
175
471
870
$
159,989
$
121,787
$
38,202
It is important that all funds maintain a sufficient fund balance to provide working capital.
Capital Projects Funds
The capital projects fund account for the acquisition and construction of major capital facilities other than those financed by
proprietary funds. As projects are completed, any remaining funds should be transferred to their funding source. The
following summarizes fund balances (deficits) for capital projects:
Fund
Major
2006 Trondheim Road Extension
Nonmajor
Municipal Building
Capital Outlay
Total
Fund Balances (Deficits)
December 31,
2009
2008
$
(119,680)
$
(385,903)
343,129
$
(162,454)
(119,101)
Increase
(Decrease)
$
(388,903)
333,196
$
(174,808)
(579)
3,000
9,933
$
12,354
The Trondheim Road Extension fund and Municipal Building fund have deficit fund balances at the end of the year. It
appears future revenues may not be sufficient to eliminate the deficits. It has been discussed that tax levies may need to be set
aside to close out the municipal building fund and future assessment levies will close out the 2006 Trondheim Road Extension
fund.
City of Kenyon
April 6, 2010
Page 14
Debt Service Funds
Debt service funds are a type of governmental fund to account for the accumulation of resources for the payment of interest
and principal on debt (other than enterprise fund debt).
Debt service funds may have one or a combination of the following revenue sources pledged to retire debt as follows:
•
Property taxes - Primarily for general City benefit projects such as parks and municipal buildings. Property taxes
may also be used to fund special assessment bonds which are not fully assessed.
•
Tax increments - Pledged exclusively for tax increment/economic development districts.
•
Capitalized interest portion of bond proceeds - After the sale of bonds, the project may not produce revenue (tax
increments or special assessments) for a period of one to two years. Bonds are issued with this timing difference
considered in the form of capitalized interest.
•
Special assessments - Charges to benefited properties for various improvements.
In addition to the above pledged assets, other funding sources may be received by Debt Service funds as follows:
•
•
•
•
Residual project proceeds from the related capital projects fund
Investment earnings
State or federal grants
Transfers from other funds
All debt service funds with the total assets and debt remaining to be paid are shown below:
Total
Cash
Debt Description
2007 G.O. Refunding
$
138,405
December 31, 2009
Total
Assets
$
139,866
Outstanding
Debt
$
1,020,000
Final
Maturity
Date
2/1/2020
City of Kenyon
April 6, 2010
Page 15
The following chart is the estimated cash flow analysis for the 2007 G.O. refunding bond. The debt service requirements
include a $425 fiscal agent fee each year.
Estimated
Estimated
Estimated
Beginning
Debt
Interest
Ending
Levy
Collection/
Cash
Service
Scheduled
and
Cash
Year
Payment Year
Balance
Requirement
Levy
Assessments
Balance
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
138,405
95,102
96,708
103,540
105,050
112,676
86,378
85,280
84,170
88,012
91,787
$
(198,095)
(123,385)
(119,965)
(121,355)
(117,555)
(118,655)
(90,117)
(87,043)
(83,930)
(85,675)
(87,210)
$
152,052
124,040
125,830
121,830
124,130
91,230
88,155
85,080
86,930
88,570
-
$
2,740
951
967
1,035
1,051
1,127
864
853
842
880
918
$
95,102
96,708
103,540
105,050
112,676
86,378
85,280
84,170
88,012
91,787
5,495
Special assessments are usually certified once to the County for collection, but tax levies need to be certified annually. We
recommend management pay particular attention to annual tax levies and transfers listed in each bond issue book to ensure
proper funding of debt service. The amounts levied for collection in previous years have not matched the levy as scheduled
by the City’s bond book for the 2007 G.O. Refunding bonds. As a result, the Council should be aware that future levies will
need to be more than originally scheduled in order to meet State statute 475.61 which requires that if levies are “collected in
full, they, together with estimated collections of special assessments and other revenues pledged for payment of the
obligations, will produce at least five percent in excess of the amount needed to meet the principal and interest payments on
the obligations when due.” Above is the schedule of levies to and estimated cash reserves to the end of the debt service
requirements.
The 2000 EDA Public Project Revenue Bonds was refunded in 2007 and is considered defeased. Accordingly, this fund was
closed in 2009 to the 2007 G.O. Refunding debt service fund.
City of Kenyon
April 6, 2010
Page 16
Enterprise Funds
The activities of the Enterprise funds include the liquor, sewer, storm sewer, electric, and water. The electric and water
operations, under the direction of the Utilities Commission, are included in the financial statements since Council has the
ultimate oversight responsibility for their operations.
Liquor Fund
A comparison of the past three years Liquor fund operations is as follows:
2007
Total
Sales
Cost of sales
Gross profit
$ 531,306
(316,237)
215,069
Operating expenses
Income (loss)
from operations
Nonoperating revenues
Transfers out
2008
Percent
100.0 %
(59.5)
40.5
Total
$ 616,930
(373,709)
243,221
2009
Percent
100.0 %
(60.6)
39.4
Total
$ 607,617
(406,779)
200,838
Percent
100.0 %
(66.9)
33.1
(277,460)
(52.2)
(226,955)
(36.8)
(204,503)
(33.7)
(62,391)
45,192
-
(11.7)
8.5
-
16,266
4,576
(10,000)
2.6
0.7
(1.6)
(3,665)
16,628
-
(0.6)
2.7
-
Change in net assets
$
(17,199)
Cash and temporary
investments
$
Advances from
other funds
$
(3.2) %
$
10,842
5,779
$
79,258
$
1.7 %
$
12,963
5,793
$
12,784
64,188
$
48,737
2.1 %
Liquor Fund Summary
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$$(100,000)
2007
2008
2009
Sales
Cost of sales
Operating expenses
Nonoperating revenues
Change in net assets
Cash and temporary investments
City of Kenyon
April 6, 2010
Page 17
Sales were down 1.5 percent from 2008 and the fund had an operating gain of $12,963 in 2009. Management should
continue to evaluate operations to ensure that the store generates positive cash flow and remains profitable. The General
fund advanced $79,258 to the Liquor fund to cover the deficit cash balance at the end of 2007, of which a portion has
been paid during 2009, resulting in an ending balance of $48,737.
The Office of the State Auditor annually publishes a report analyzing the operation of municipal liquor stores in the state.
The most recent year of published information is for the year ended December 31, 2008. The statewide averages for all
operations are summarized below.
Combined On and Off Sale
2006
2007
2008
Percent
Percent
Percent
of Sales
of Sales
of Sales
Sales
Cost of sales
Gross profit
100.0 %
60.3
100.0 %
60.8
100.0 %
62.4
39.7
39.2
37.6
Operating expenses
36.1
35.9
35.3
Operating income
3.6
3.3
2.3
Nonoperating revenue
0.9
0.9
0.5
4.5 %
4.2 %
2.8 %
Income before transfers
Source: Analysis of Municipal Liquor Store Operations, for the year ended December 31, 2008
Published by the Minnesota Office of the State Auditor
The gross profit percentage of the City has remained around 40 percent over the three years presented but each combined
operation has quite a different mix of what makes up their on and off-sale. The more important statistic is the operating
expenses and the income before transfers. The bottom line for the City is getting closer to the state wide averages and
operating expenses (34.6 percent and 37.3 percent for 2009 and 2008 respectively, however 52.2 percent of sales in
2007) have greatly improved in relation to the 2006, 2007, and 2008 statewide averages.
City of Kenyon
April 6, 2010
Page 18
Sewer Fund
A comparison of the past three year’s Sewer fund operations is as follows:
2007
Total
Operating revenues
Operating expenses
$
2008
Percent
297,670
350,962
100.0 %
117.9
Operating income
(53,292)
Nonoperating
revenues (expenses)
Income (loss) before
contributions
Capital contributions
Total
Total
$
269,909
261,030
Percent
285,211
338,577
100.0 %
118.7
(17.9)
(53,366)
(18.7)
8,879
3.3
15,972
5.4
(4,963)
(1.7)
(3,974)
(1.5)
(37,320)
131,382
(12.5)
44.1
(58,329)
-
(20.4)
-
4,905
-
1.8
-
$
(58,329)
(20.4) %
$
4,905
1.8 %
31.6 %
$
2009
Percent
Change in net assets
$
94,062
Cash and temporary
investments
$
579,968
$
475,945
$
461,079
Bonds payable
$
335,000
$
215,000
$
90,000
100.0 %
96.7
Sewer Operations Summary
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$$(100,000)
2007
2008
Operating revenues
Operating expenses
Income (loss) before transfers
Cash and temporary investments
2009
Nonoperating revenues (expenses)
The cash balance remains strong relative to operations but it is necessary to maintain a higher balance due to outstanding
bonds. Operating expenses decreased from 2008, this was largely due to the cost of personal services decreasing by
$77,653 from 2008. Charges for services covered operating expenses during the past year. The City completed a rate
study in 2009 and will be reviewing the rates each year.
City of Kenyon
April 6, 2010
Page 19
Storm Sewer Fund
A comparison of the past three year’s Storm Sewer fund operations is as follows:
2008
2007
Total
Operating revenues
Operating expenses
Operating
income (loss)
$
23,679
45,592
Percent
100.0 %
192.5
Total
$
23,593
71,158
2009
Percent
100.0 %
301.6
Total
$
23,886
21,230
Percent
100.0 %
88.9
(21,913)
(92.5)
(47,565)
(201.6)
2,656
11.1
Nonoperating revenues
14,739
62.2
25,466
107.9
5,640
23.6
Income (loss) before
contributions
and transfers
Capital contributions
Transfers out
(7,174)
86,322
(35,138)
(30.3)
364.6
(148.4)
(22,099)
-
(93.7)
-
8,296
-
34.7
-
$
(22,099)
(93.7) %
$
8,296
34.7 %
$
378,089
$
400,713
Change in net assets
$
44,010
Cash and temporary
investments
$
482,521
185.9 %
Storm Sewer Operations Summary
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$$(100,000)
2007
2008
Operating revenues
Operating expenses
Income (loss) before transfers
Cash and temporary investments
2009
Nonoperating revenues
The cash balance at the end of 2009 remains strong compared to operations. Charges for services were sufficient to cover
operating costs in 2009.
City of Kenyon
April 6, 2010
Page 20
Electric Fund
A comparison of the past three years Electric fund operations is as follows:
2007
2009
2008
Percent
Total
$ 2,206,029
1,984,749
Operating income
221,280
10.0
113,712
5.9
Nonoperating
revenues (expenses)
58,235
2.6
13,657
0.7
279,515
(71,174)
12.6
(3.2)
127,369
(69,777)
6.6
(3.6)
Change in net assets
$
208,341
Unrestricted cash and
temporary investments
$
Bonds payable
9.4 %
$ 1,927,064
1,813,352
Percent
Operating revenues
Operating expenses
Income before transfers
Transfers out
100.0 %
90.0
Total
$
57,592
781,762
$
$ 1,220,000
$
100.0 %
94.1
3.0 %
Total
$ 1,704,739
1,572,941
131,798
Percent
100.0 %
92.3
7.7
(3,324)
(0.2)
128,474
(98,447)
7.5
(5.8)
$
30,027
807,452
$
760,996
925,000
$
695,000
1.7 %
Electric Operations Summary
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$$(500,000)
2007
2008
Operating revenues
Operating expenses
Income before transfers
Cash and temporary investments
2009
Nonoperating expenses
The operating income and cash balance remain strong and also has good operating margins. In 2009, operating revenues
decreased by 11.5 percent while the operating expenses decreased by 14.2 percent. The Commission completed a rate
study in 2009 and will be reviewing the rates each year.
City of Kenyon
April 6, 2010
Page 21
Water Fund
A comparison of the past three years Water fund operations is as follows:
2007
Operating revenues
Operating expenses
Operating
income (loss)
$
2008
Percent
Total
215,312
188,951
Total
100.0 %
87.8
$
2009
Percent
202,304
235,292
100.0 %
116.3
26,361
12.2
(32,988)
(16.3)
Nonoperating revenues
28,148
13.1
1,196
0.6
Income (loss) before
contribitions
Capital contributions
54,509
64,042
25.3
29.7
(31,792)
-
(15.7)
-
$
(31,792)
(15.7) %
Change in net assets
$
118,551
55.0 %
Cash and temporary
investments
$
288,385
$
Bonds payable
$
98,000
$
Percent
Total
$
198,632
188,288
100.0 %
94.8
10,344
5.2
983
0.5
11,327
-
5.7
-
$
3,427
294,674
$
257,102
88,000
$
78,000
1.7 %
Water Operations Summary
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$$(50,000)
2007
Operating revenues
Operating expenses
2008
Change in net assets
2009
Cash and temporary investments
In 2009 the operating expenses decreased 20 percent while the operating revenue decreased 4 percent. It is important the
Commission review the rates each year to ensure that any permanent increases in expense are considered within the rate
structure. The Commission completed a rate study in 2009 and will be reviewing rates each year to ensure that any
permanent increases in expense are considered within the rate structure. Cash has remained strong compared to
operations for the past three years.
City of Kenyon
April 6, 2010
Page 22
Ratio Analysis
The following captures a few ratios from the City’s financial statements that give some additional information for trend and peer
group analysis. The peer group average is derived from information available on the website of the Office of the State Auditor.
Different peer group averages are used for 4th class cities with populations less than 2,500. The majority of these ratios facilitate
the use of economic resources focus and accrual basis of accounting at the government-wide level. A combination of liquidity
(ability to pay its most immediate obligations), solvency (ability to pay its long-term obligations), funding (comparison of financial
amounts and economic indicators to measure changes in financial capacity over time) and common-size (comparison of financial
data with other cities regardless of size) ratios are shown below.
Ratio
Calculation
Source
2006
2007
2008
2009
24.7%
32.2%
21.6%
33.1%
18.2%
31.7%
15.2%
N/A
118.9%
N/A
Debt to assets
Total liabilities/total assets
Government-wide
Debt service coverage
Net cash provided by operations/
enterprise fund debt payments
Enterprise funds
128.4%
131.6%
124.0%
109.1%
85.7%
94.9%
Debt per capita
Bonded debt/population
Government-wide
$ 1,629
$ 2,728
$ 1,765
$ 3,074
$
870
$ 2,488
$
681
N/A
Current expenditures per capita
Governmental fund current
expenditures/population
Governmental funds
$
848
N/A
$
$
793
644
$
$
831
645
$
674
N/A
Capital expenditures per capita
Governmental fund capital
outlay/population
Governmental funds
$
98
N/A
$
$
82
454
$
$
236
292
$
63
N/A
Taxes per capita
Tax revenues/population
Government-wide
$
$
294
363
$
$
355
377
$
$
363
385
$
354
N/A
Capital assets % left to
depreciate - Governmental
Net capital assets/
gross capital assets
Government-wide
76.5%
63.9%
76.3%
63.3%
76.0%
59.6%
74.2%
N/A
Capital assets % left to
depreciate - Business-type
Net capital assets/
gross capital assets
Government-wide
49.7%
62.3%
49.9%
61.8%
47.7%
60.9%
45.3%
N/A
Represents the City of Kenyon
Peer Group ratio
Debt-to-Assets Leverage Ratio (Solvency Ratio)
The debt-to-assets leverage ratio is a comparison of a city’s total liabilities to its total assets or the percentage of total assets that
are provided by creditors. It indicates the degree to which the City’s assets are financed through borrowings and other long-term
obligations (i.e. a ratio of 50 percent would indicate half of the assets are financed with outstanding debt).
Debt Service Coverage Ratio (Solvency Ratio)
The debt coverage ratio is a comparison of cash generated by operations to total debt service payments (principal and interest) of
enterprise funds. This ratio indicates if there are sufficient cash flows from operations to meet debt service obligations. Except in
cases where other nonoperating revenues (i.e. taxes, assessments, transfers from other funds, etc.) are used to fund debt service
payments, an acceptable ratio would be above 100 percent.
City of Kenyon
April 6, 2010
Page 23
Bonded Debt per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total bonded debt by the population of the city and represents the amount of
bonded debt obligation for each citizen of the city at the end of the year. The higher the amount, the more resources are needed in
the future to retire these obligations through taxes, assessments or user fees.
Current Expenditures per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total current governmental expenditures by the population of the City and
represents the amount of governmental expenditure for each citizen of the City during the year. Since this is generally based on
ongoing expenditures, we would expect consistent annual per capita results.
Capital Expenditures per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total governmental capital outlay expenditures by the population of the City and
represents the amount of capital expenditures for each citizen of the City during the year. Since projects are not always recurring,
the per capita amount will fluctuate from year to year.
Taxes per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total tax revenues by the population of the city and represents the amount of taxes
for each citizen of the city for the year. The higher this amount is, the more reliant the city is on taxes to fund its operations.
Capital Assets Percentage (Common-size Ratio)
This percentage represents the percent of governmental or business-type capital assets that are left to be depreciated. The lower
this percentage, the older the city’s capital assets are and may need major repairs or replacements in the near future. A higher
percentage may indicate newer assets being constructed or purchased and may coincide with higher debt ratios or bonded debt per
capita.
City of Kenyon
April 6, 2010
Page 24
Future Accounting Standard Changes
The following Governmental Accounting Standards Board (GASB) Statements have been issued and may have an impact on
future City financial statements:
GASB Statement No. 51 - Accounting and Financial Reporting for Intangible Assets
This statement was issued in June 2007 and is effective for periods beginning after June 15, 2009.
The new standard characterizes an intangible asset as an asset that lacks physical substance, is nonfinancial in nature, and has an
initial useful life extending beyond a single reporting period. Examples of intangible assets include easements, computer software,
water rights, timber rights, patents, and trademarks.
This statement requires that intangible assets be classified as capital assets (except for those explicitly excluded from the scope of
the new standard, such as capital leases). Relevant authoritative guidance for capital assets should be applied to these intangible
assets. The statement provides additional guidance that specifically addresses the unique nature of intangible assets, including:
•
Requiring that an intangible asset be recognized in the statement of net assets only if it is considered identifiable
•
Establishing a specified-conditions approach to recognizing intangible assets that are internally generated (for example,
patents and copyrights)
•
Providing guidance on recognizing internally generated computer software
•
Establishing specific guidance for the amortization of intangible assets.
GASB Statement No. 54 – Fund Balance
This statement was issued in March of 2009 and is effective for periods beginning after June 15, 2010. This new standard is
intended to improve the usefulness of information provided to financial report users about fund balance by providing clearer, more
structured fund balance classifications, and clarifying the definitions of existing governmental fund types.
GASB No. 54 distinguishes fund balance between amounts that are considered non-spendable, such as fund balance associated
with inventories, and other amounts that are classified based on the relative strength of the constraints that control the purposes for
which specific amounts can be spent. The following classifications and definitions will be used:
•
•
•
•
Restricted - amounts constrained by external parties, constitutional provision, or enabling legislation
Committed - amounts constrained by a government using its highest level of decision-making authority
Assigned - amounts a government intends to use for a particular purpose
Unassigned - amounts that are not constrained at all will be reported in the general fund.
In addition to the classifications of fund balance, the standard clarified the definitions of individual governmental fund types, for
example, special revenue funds, debt service funds, and capital project funds.
City of Kenyon
April 6, 2010
Page 25
* * * * *
This report is intended solely for the information and use of Council, management and the Minnesota Office of the State Auditor
and is not intended to be and should not be used by anyone other than these specified parties.
Our audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of the accounting
records and related data. The comments and recommendations in the report are purely constructive in nature, and should be read
in this context.
If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your
convenience. We wish to thank you for the opportunity to be of service and for the courtesy and cooperation extended to us by
your staff.
April 6, 2010
Minneapolis, Minnesota
ABDO, EICK & MEYERS, LLP
Certified Public Accountants